Bayer MaterialScience

Key Data – MaterialScience	2007	2008	Change
	€ million	€ million	%
Sales	10,435	9,738	-6.7
Systems	7,394	7,130	-3.6
Materials	3,041	2,608	-14.2
Sales by Region
Europe	4,585	4,267	-6.9
North America	2,376	2,108	-11.3
Asia/Pacific	2,229	2,098	-5.9
Latin America/Africa/Middle East	1,245	1,265	+1.6
EBITDA*	1,542	1,041	-32.5
Special items	(64)	(47)
EBITDA before special items*	1,606	1,088	-32.3
EBITDA margin before special items	15.4%	11.2%
EBIT *	1,042	537	-48.5
Special items	(75)	(49)
EBIT before special items*	1,117	586	-47.5
Gross cash flow**	1,228	850	-30.8
Net cash flow**	1,147	782	-31.8
* for definition see “Calculation of EBIT(DA) Before Special Items” ** for definition see “Liquidity and Capital Resources”

Sales of the MaterialScience subgroup came in at €9,738 million in 2008, down 6.7% from the prior-year figure of €10,435 million. After adjusting for currency and portfolio effects, sales fell by 4.6%. Selling price increases were more than offset by a drop in volumes, particularly in the fourth quarter. The global financial and economic crisis impacted MaterialScience in nearly all product groups and regions.

EBITDA before special items fell by 32.3% from the year before, to €1,088 million (2007: €1,606 million). Earnings were hampered by a €0.5 billion increase in purchase prices for petrochemical raw materials and energies. In addition, volumes and capacity utilization dropped significantly in the wake of the economic slump, especially in the fourth quarter. The relative easing of prices on the raw material markets of importance to MaterialScience did not yet significantly improve earnings in the fourth quarter. Selling price increases, the savings from our restructuring program and further countermeasures adopted only partially offset the negative volume and raw material cost effects over the year as a whole. Accordingly, EBIT before special items dropped by 47.5% to €586 million (2007: €1,117 million). We took special charges of €49 million (2007: €75 million) in connection with the restructuring program initiated in 2007. EBIT fell by 48.5% to €537 million (2007: €1,042 million).

Systems

Key Data – Systems	2007	2008	Change
	€ million	€ million	%
Sales	7,394	7,130	-3.6
Polyurethanes	5,224	4,894	-6.3
Coatings, Adhesives, Specialties	1,598	1,586	-0.8
Industrial Operations	423	489	+15.6
Other	149	161	+8.1
Sales by Region
Europe	3,446	3,269	-5.1
North America	1,802	1,635	-9.3
Asia/Pacific	1,192	1,229	+3.1
Latin America/Africa/Middle East	954	997	+4.5
EBITDA*	1,269	980	-22.8
Special items	(64)	(32)
EBITDA before special items*	1,333	1,012	-24.1
EBITDA margin before special items	18.0%	14.2%
EBIT *	942	636	-32.5
Special items	(75)	(34)
EBIT before special items*	1,017	670	-34.1
Gross cash flow**	991	779	-21.4
Net cash flow**	964	557	-42.2
* for definition see “Calculation of EBIT(DA) Before Special Items” ** for definition see “Liquidity and Capital Resources”

Sales of our Systems segment in 2008 amounted to €7,130 million, down 3.6% from the previous year. We acquired a number of systems houses to strategically reinforce our polyurethanes business. After adjusting for currency and portfolio effects, business shrank by 2.7%. For the year as a whole, we came close to offsetting the significant decline in volumes by raising our prices. In the fourth quarter the segment could not escape the effects of a steep drop in global demand in the wake of the financial and economic crisis.

Sales in our Polyurethanes business unit receded by 6.3% to €4,894 million (2007: €5,224 million). On a currency- and portfolio-adjusted basis, sales decreased by 4.3%. Business with diphenylmethane diisocyanate ( info

MDI) was slightly down on an adjusted basis. Sales expanded in the Asia/Pacific region but moved back in the North America and Latin America regions. By contrast, sales of toluene diisocyanate ( info

TDI) moved ahead, with all regions except Europe contributing to growth. Sales of polyethers ( info

PET) declined sharply despite selling price increases. With the exception of Latin America, we registered a drop in sales in all regions.

Sales of our Coatings, Adhesives, Specialties business unit were almost level with the prior year at €1,586 million (-0.8%). On a currency- and portfolio-adjusted basis, sales decreased by 4.0%. Business expanded in Asia/Pacific and Latin America, while sales in Europe and North America declined.

The Industrial Operations business unit saw a gratifying 15.6% rise in sales in 2008, to €489 million. The currency-adjusted increase was 17.7%. This was mostly attributable to price increases achieved for sodium hydroxide solution in both Germany and the United States and also to slightly higher volumes.

The Systems segment generated EBITDA before special items of €1,012 million, down 24.1% year on year. The selling price increases we implemented and the savings from our restructuring program did not fully compensate for the combined effect of the sharply higher average raw material and energy costs for the year and the drop in volumes. Earnings were also held back, particularly in the fourth quarter, by a demand-related drop in plant utilization rates and by start-up costs for our new MDI plant in Shanghai, China. EBIT before special items decreased by 34.1% to €670 million (2007: €1,017 million). Our restructuring program led to special charges of €34 million (2007: €75 million) for the full year. EBIT moved back by 32.5% to €636 million.

Materials

Key Data – Materials	2007	2008	Change
	€ million	€ million	%
Sales	3,041	2,608	-14.2
Polycarbonates	2,811	2,372	-15.6
Thermoplastic Polyurethanes	230	236	+2.6
Sales by Region
Europe	1,139	998	-12.4
North America	574	473	-17.6
Asia/Pacific	1,037	869	-16.2
Latin America/Africa/Middle East	291	268	-7.9
EBITDA*	273	61	-77.7
Special items	0	(15)
EBITDA before special items*	273	76	-72.2
EBITDA margin before special items	9.0%	2.9%
EBIT*	100	(99)	•
Special items	0	(15)
EBIT before special items*	100	(84)	•
Gross cash flow**	237	71	-70.0
Net cash flow**	183	225	+23.0
* for definition see “Calculation of EBIT(DA) Before Special Items” ** for definition see “Liquidity and Capital Resources”

Sales of the Materials segment receded by 14.2% to €2,608 million (2007: €3,041 million). On a currency- and portfolio-adjusted basis, the decline amounted to 9.5%.

Sales of the Polycarbonates business unit fell by 15.6% to €2,372 million. After adjusting for currency and portfolio effects, sales dropped by 10.1%. This resulted primarily from the effects of the financial and economic crisis, which led to lower volumes in the fourth quarter of 2008 in nearly all regions and product groups. Only in the polycarbonate sheet business did we post a slight increase in volumes.

Sales of the Thermoplastic Polyurethanes business unit rose by 2.6% to €236 million. Adjusted for currency and portfolio effects, however, business declined by 2.4%. Price increases, which were implemented in all regions, only partially offset the drop in sales resulting from lower volumes.

EBITDA before special items of the Materials segment fell steeply to €76 million (-72.2%). This fall in earnings was mainly caused by sharp increases in average raw material and energy costs for the year combined with a demand-related drop in volumes, particularly in the fourth quarter, and lower capacity utilization as a result of the financial and economic crisis. Earnings were enhanced by the savings achieved from the cost structure program initiated in 2007. EBIT before special items for the Materials segment came in at minus €84 million (2007: €100 million). Special charges for restructuring in 2008 amounted to €15 million. EBIT amounted to minus €99 million (2007: €100 million). Against this background we reduced working capital, improving net cash flow in the Materials segment by 23.0% to €225 million.